The National Bank of Denmark published a working paper examining how safer unemployment conditions can encourage risky, high growth experimentation by young firms. The authors’ model shows that better reemployment prospects reduce the wage premium workers require for accepting jobs with greater failure risk, lowering labor costs for experimental firms. In a calibrated counterfactual, a 12.3 percentage point increase in the quarterly job finding rate raises the share of entrants choosing experimentation by 6.42 percentage points and aggregate productivity by 1.05%, mainly by increasing the share of highly productive firms. Danish employer and employee data for 2008-2022 support the model’s wage mechanism. In the preferred specification, a one standard deviation increase in the local job finding rate reduces young firms’ wages relative to mature firms by about 0.62 percentage points. The authors treat this as a conditional association because local job finding rates are not randomly assigned and firm age is only a proxy for experimentation risk. A randomized survey experiment provides direct evidence on workers’ compensation requirements. Doubling expected unemployment duration raises the wage premium required to accept a job at a higher failure risk young firm by about 2.3 percentage points, compared with 2.85 percentage points in the model. The paper does not assess specific labor market institutions or identify the effects of particular policies, and its conclusions are those of the authors rather than the National Bank of Denmark.
National Bank of Denmark working paper links stronger job finding prospects to greater young firm experimentation and productivity
A National Bank of Denmark working paper finds that better reemployment prospects can reduce the wage premium demanded from risky young firms, encouraging experimentation and raising productivity. Danish administrative data show that stronger local job finding conditions narrow young firms’ relative wages, while a randomized survey finds that doubling expected unemployment duration raises the required risk premium by about 2.3 percentage points. The research does not evaluate specific policies.